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Rabu, 29 Juni 2011

Destocking has created a big buying opportunity - CLSA

I have just returned from a week vacation. For now I am feeling very much recharged. From stock market volume point of view, I think I didn’t miss much. Not much improvement last week, very quiet. Summer, school holiday, and QE3/QE2+ uncertainties have translated into a sleepy market.

But CLSA on the ground specialist, Amie “Komodo” Liem is always full of energy. She went to her hometown Cilacap in Central Java to find out what’s going on there. The city is an industrial area. Holcim (SMCB IJ) has its biggest cement plant (7.2mn tones) there. State owned oil and gas company Pertamina has their biggest refining facilities (348k bpd) in Cilacap.

Iron ore mining in some selected areas and better incentives for teachers have contributed to the strong economy in the region. Car sales are very strong with dealers set around 30% higher sales target for this year. Retailer Alfamart (AMRT IJ) has a strong presence with no less than 40 outlets in Cilacap alone.

On a separate issue, there has been an interesting divergence of performance in resources companies share prices and underlying commodity price. This is especially true in the gold and coal space where prices of commodity has been holding up very well while their respective miners got indiscriminately sold off.

While I would agree it is not easy to quantify the real demand for bullion, demand for coal is a different story. Our recent China Reality Research showed that coal inventory at major ports and powerplants are critically low. Meeting with some Chinese coal traders (representing state owned power plants + privately owned steel mills) here last week tell us the same story. They desperately need to source coal (each contract size from 1-3mm tons/annum). According to the traders, most of the 2H2011 coal output of major coal miners have been sold out and they need to go down to those smaller miners (those abt 5-10mt pa) who are more willing to sell on spot.

Due to China's tightening policy, the short term cost of capital gas been so high that owners of slack resources would apparently rather sell them at discount to quoted prices so they can release capital that might be needed. This has translated to critically low stock piles in commodities such as coal, copper and even rubber. (note: Copper stockpiles monitored by Shanghai Futures Exchange declined to 21 month low). As we head into peak demand season 4Q, we expect resumption of restocking in the 3Q.

Destocking has created a big buying opportunity. I would be buyers of Bumi (BUMI IJ), Borneo (BORN IJ) and Harum (HRUM IJ) .

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